Will Baby Boomers Drag Down Growth?

The aging of America’s population is often cited as a headwind for U.S. economic growth over the long haul. But two reports — one from a Wall Street economist and another presented at this year’s Population Association of America conference today — suggest offsetting factors can diminish aging’s economic effects.

In a report last month, Torsten Slok, chief international economist at Deutsche Bank AG, called concerns about the economic effects of population aging “overblown.” While the growing number of retiring baby-boomers relative to productive workers does mean fewer available workers and extra burdens for those in the labor force, there’s little reason to assume these effects will cripple the nation’s economic output — or not be outweighed by things like immigration that could replenish the economy’s labor supply.

At the first day of this year’s PAA conference in New Orleans, David Neumark and Joanne Song at the University of California, Irvine, looked at whether efforts to boost the retirement age in different states — aimed at keeping older people in the labor force — are working, or being cancelled out by things like age discrimination and the physical demands of working when you’re old. Their finding? In states with stronger age-discrimination laws, some older people were finding ways to keep working.

There are few things more vital to an economy than an expanding population, which provides more workers, and rising productivity, or the ability to do more with less.

Economists generally think the retirement of America’s baby-boom generation will weigh on the U.S.’s long-term growth prospects since there’ll be fewer available workers.

Robert Gordon, a professor at Northwestern University, has a particularly gloomy prognosis for America’s economic growth that depends significantly on this notion that the aging population will throttle back growth on a per-capita basis.

In his report, Deutsche Bank’s Mr. Slok (along with colleague Peter Hooper) tries to quantify this effect — and finds it only deducts 0.2 percentage points from annual U.S. GDP growth on average through 2030 — and that the negative effects diminish over time. He says his results are similar to numbers from the Congressional Budget Office, which estimated demographics would fuel a 0.2 percentage point decline in the labor-force participation rate — that is, the share of Americans who are working or looking for work — through 2021.

How did Mr. Slok do this? First, he split up inflation-adjusted GDP growth into three demographic drivers: population growth, changes in the labor-force participation rate and productivity growth. The biggest effect from aging, he argues, comes from the second of these three channels. Mr. Slok then runs his analysis using population forecasts through 2060 from the U.S. Census Bureau. “We can isolate [the] demographic effect by controlling for changes in the participation rate within each age group, and only allowing population shares to change over time,” he explains.

Even this effect could be outweighed by other factors, such as a rebound in America’s fertility rate or a return to the labor force by younger Americans currently in school, and end up boosting the labor-force participation rate.

Another possibility: Older people whose nest eggs were cracked by the financial crisis and recession could work further into their old age. And what if America’s national retirement age rises?

Demographers have worried that things like age discrimination in the workplace and the physical demands of work could push older people out of the labor force even if the retirement age rises, but the paper today from Mr. Neumark and Ms. Song, titled “Barriers to Later Retirement,” suggests otherwise.

They looked at what’s happening to people in states with higher retirement ages, along with these states’ age discrimination laws, and found stronger age-discrimination laws helped keep people in jobs. “There is an increase in hiring” and “transitions to new jobs,” Mr. Neumark said.

Of course, many older people simply find it hard to work physically demanding jobs, but some were able to change to easier jobs. The upshot: Maybe older people who want to stay working won’t necessarily be shunted by physical weakness and discrimination.

Worries about aging’s effects on the economy also lose sight of one other big issue: Immigration, which could help replenish the workers America is losing to old age. A path to citizenship for undocumented workers and a better program of visas for highly-educated foreigners — things on the table right now — could change America’s labor force and economy in ways that are hard to quantify now.

There’s no doubt the aging population will have effects on the U.S.’s long-term GDP. But it may be too early to tell whether it’s a major obstacle for America, or just a bump in the road. We may not be Europe or Japan just yet.

About Real Time Economics

Real Time Economics offers exclusive news, analysis and commentary on the U.S. and global economy, central bank policy and economics. Send news items, comments and questions to the editors and reporters below or email realtimeeconomics@wsj.com.